Strategic Planning Session: What Next
Many organizations have gone through huge changes in recent times. They have downsized operations and reallocated, delayed, or curtailed investments in response to unprecedented market fluctuation. Valued employees have been shaken as they have seen friends and colleagues depart and feel that they face an uncertain future. As strategic plans are set for next year and the years beyond, the tasks of determining global strategic priorities and how to allocate limited resources have never been more crucial. Amidst a shifting business landscape, what are key underlying trends that we need to take into account, and what are their practical implications for strategy?
There are three mega-trends that are impacting the global business environment which are likely to continue to exert an increasingly important influence over the next decade. These are: 1) population growth in the developing world; 2) changes in the balance of GDP between developed and emerging markets; and, 3) rapid urbanization in Asia and Africa. While these trends may sound familiar, they each have implications that few, if any, corporations have fully come to terms with.
Mega-Trend #1: Population Growth in the Developing World
It is well-known that our planet is in the midst of the greatest boom in the human population it has ever seen. Demographers project that in the short span of one hundred years, from 1950 to 2050, the world’s population will have grown from approximately 2.5 billion to over 9 billion. Such trends are slow to change, and even though population growth has moderated in some locations over the last decades, it is still probable that we will hit or exceed the 9 billion mark within our own lifetimes or those of our children.
What is less commonly recognized about this trend is that virtually 100% of this population growth is occurring in the developing world. The number of people in the developed world was slightly under a billion in 1950, and the population of those same countries in 2050 will probably be little more than a billion. So, almost the entire increase of 6.5 billion people over this hundred year span will be in countries that represented only 1.5 billion people in 1950 – this amounts to a a fourfold increase in the developing countries vis a vis the stagnant population size of the developed world. (See Figure 1 below.)1 This trend has tremendous implications for future markets, consumer demand, workforce demographics, talent availability and readiness, and so on.
Mega-Trend #2: Changes in GDP
Companies accustomed to earning the bulk of their revenues in North America and Europe might tend to downplay the population trend outlined above based on the argument that the biggest customers and business opportunities are still where they have always been in recent memory. However, along with the shifting balance in population has come a watershed change in the balance of global GDP. Estimates suggest that the combined GDP of the emerging economies has begun to exceed that of the developed world within the last few years, and that this trend will accelerate to the point where the size of the emerging economies will soon be as much as double that of developed economies (See Figure 2).2
These emerging economies are still in the process of adding another group of middle class consumers, estimated variously at more than half a billion people, that will exceed the size of all of Europe. What makes this trend particularly hazardous to ignore is that patterns of both production and consumption in the emerging markets are no longer focused on basic commodities, but now include products and services usually regarded as “hi-tech.” Here are some examples:
- “SIA (Semiconductor Industry Association) expects… (that) developing countries will account for over half of world-wide PC sales and about two-thirds of mobile phone sales… Demand for consumer electronic products in these new markets will continue to outpace growth in developed markets… 2
- China has by far the largest number of internet users, with an online population of about 340 million that exceeds the entire population of the U.S. 3
- Automotive industry projections for 2009 are for 10% market growth in China versus minus 23% in US and minus 15% in Europe. 4
In a sense, this shift represents a return to the old normal. Looking back over the centuries, it could be argued that China has been the world’s largest economy for most of the last 2,000 years up until the last few centuries, and that the Indian subcontinent had the world’s second largest economy for at least several hundred years – hence, the relatively greater size of the emerging economies prior to the mid-1800’s. 5
Mega-Trend #3: Urbanization in Asia & Africa
For the global economy it makes a big difference where people live and what their occupations are. Rural populations that are engaged primarily in subsistence agriculture are less likely to purchase or provide goods and services that are delivered across geographic boundaries. When such people move to an urban center, however, their life styles tend to become far more enmeshed in global commerce. For example, they may go to work in factories that produce goods for customers on the other side of the world, and they gradually gain the purchasing power to buy clothes, foods, and consumer items produced elsewhere.
North America and Europe already had a majority of their populations living in cities in 1950, and have become progressively more urban since that date, with well over 70% of their inhabitants now living in urban centers. In contrast, Asia and Africa were predominantly rural through the twentieth century, and are just now undergoing the urban transformation that other parts of the world experienced many decades ago. (See Figure 3 below.)6Given the accompanying rapid population increase, this means burgeoning growth of cities in the world’s emerging markets of a size and scale never before seen on the planet.
Implications for Strategy: The Need for a Global Mindset
The three mega-trends outlined above have a huge collective impact that is affecting almost every aspect of life on earth. Climate change, energy supply issues, deforestation, water shortages, species extinction, migration pressures, and so on can all be linked with changes in population, GDP, and urbanization. While all of humanity bears a shared responsibility for addressing these issues, commercial enterprises must learn how to manage their business through both the changes that have occurred already and those yet to come. For business leaders with an outlook shaped by the last century’s events, it is essential to grasp the full meaning of such trends going forward. We must learn to reevaluate and transform our responses to the following kinds of questions:
- Where are our key markets?
- What are the companies we should pay attention to?
- What are the major sources of innovation?
Where Are Our Key Markets?
It is easy to rely on an outmoded mental map without being fully aware of the strategic consequences. A list of the largest cities in the world in 1900 would include London, New York, Paris, Berlin, Chicago, etc., with the only non-Western city being Tokyo. By far the largest urban center on this list was London, with 6.5 million residents.7 If we look just a few years forward at projections for 2015, there are no U.S. or European cities among the top ten. The largest urban areas in the world are predicted to be places such as Mumbai, Sao Paulo, Chongqing, Shanghai, Jakarta, Lagos, Karachi, Dhaka, and Kolkata. Each will have a population that easily exceeds 15 million.8 Corporate managers who were raised in a world where the 1900 list was still the dominant reality may have trouble finding many of the cities in the 2015 list on a map, let alone traveling or living in these locations and having a functional sense of their marketplace dynamics. And yet these are the markets of the future. Any effective global strategy will need to take them into account, considering which locations to target and how to achieve commercial success in a location that may have very different consumer tastes, supply chain resources, or pricing standards.
What Are the Companies We Should Pay Attention to?
Knowing the competitive landscape is an important part of any strategy. We tend to focus on “the usual suspects;” that is, companies that have been rivals for many years and which are based in our own home market or another developed economy location. Yet strategy experts warn that the most dangerous competition can enter a market laterally from another industry or as a startup with a disruptive product concept. There is a global version of this phenomenon, which is the emerging market company that was not previously on anyone’s radar screen, but is growing rapidly and could soon become a potent force not only locally but around the world.
A veteran of the electronics industry once described how his Western firm had been very satisfied with a high rate of business growth in Japan, a key market for the company at that time. Simultaneously, a small local competitor was growing at almost double that rate, although it was still too minor within the larger scheme of things to be regarded as a significant threat. That “small local competitor” continued to prosper and today is the global giant known as Sony.
If the most significant global growth markets are the so-called BRIC countries of Brazil, Russia, India, China, to what extent are the people who shape strategy in your organization aware of the competitive threats as well as the opportunities presented by firms that are dynamic but less well known outside their home countries? Here are a few examples from various industries:
Figure 4What Are the Major Sources of Innovation?
There is a comforting myth believed by many in the developed world that emerging market firms are imitators rather than innovators, and that their products and services are nearly always derivative of those invented elsewhere. Historically, there is some truth to this claim, but it is increasingly the case that major innovations are coming from developing rather than developed countries. A disruptive innovation is defined as a product that is introduced at a significantly lower price point with adequate although not stellar functionality, and which through continuous improvement comes to rival and possibly replace products formerly regarded as higher end offerings.9 This turns out to be a rather good description of many products coming from the developing world.
The term “trickle up” — the opposite of the customary notion of technology that “trickles down” from advanced economies to the rest of the world — is even being used to describe the effects of these products. For example, GE Healthcare’s India operation designed a portable ECG device for the local market to be sold at one tenth the price of larger and more sophisticated products used in North America and Europe. That same product has now been introduced back into Germany.10 Similarly, a company called BYD has introduced a battery powered car into the Chinese automotive market that is being offered for a far lower price than the projected price for competing Japanese and U.S. products — and the Chinese product is already available. Warren Buffett has become a major stakeholder in BYD, and no doubt sees potential applications to its products that extend far beyond China. 11
The value of continuous improvement should also not be underestimated. A series of incremental innovations introduced by energetic smaller players can have a very disruptive impact over time, particularly in markets where large numbers of components are assembled to create the final product. Over the years, the markets for major industries such as automobiles, shipbuilding, home appliances, and telecommunications have been turned upside down by former “imitators” who became very good at continuous improvement. Companies such as Toyota, Hyundai Heavy Industries (shipbuilding), Haier (home appliances), and Huawei (telecommunications) are now formidable global competitors. Firms that seek to do business in emerging markets, and increasingly even in developed economies, must strategically target compelling combinations of breakthrough pricing, adequate technology, and continuous improvement that is sustained over long periods of time.
A keen sense of the mega-trends described here along with their practical implications for corporate strategy may provide one means of navigation through stormy economic times. There is much that we don’t know, but also much that is readily evident. Futurists sometimes note that the future is already available for us to observe in certain locations or laboratories around the world. Strategic plans must incorporate such insights without being “too early” or “too late.” A global network that enables us to more readily discern the impact of these trends and to focus on the most critical markets, companies, and sources of innovation can become part of a successful recipe for long-term growth.